Dollar Remains Range-Bound

NEW YORK ( BBH FX Strategy) -- The U.S. dollar is trading within Monday's ranges against the major foreign currencies Tuesday. The main exception is the Australian dollar, where the central bank kept rates on hold, but encouraged the market to look for a rate cut next month.

The unwinding of long AUD cross positions helped lift the yen after the Bank of Japan reported the first decline in its monetary base in three years. The dollar fell to its lowest level against the yen in nearly a month, with reported purchases by Japanese importers helping to steady the greenback near JPY81.50. This, in turn, helped the other main yen crosses recover from earlier losses.

The yen's strength weighed on the local share prices and the Nikkei shed 0.6%. The inverse correlation (60-day rolling on percent change) stands at -0.35, which is the strongest inversion since late November 2010. There have only been a handful of times since 1990 that the inverse correlation has been greater than it is Tuesday. The regional benchmark, the MSCI Asia-Pacific Index, rose about 0.3%.

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News that China official nonmanufacturing purchasing managers' index rose to 58 after a sharp upward revision to the February series (from 48.4 to 57.3) helped the regional currencies. Chinese markets are closed through Wednesday, but the combination of the stronger official manufacturing and non-manufacturing PMIs should help boost confidence in the soft landing scenario.

The head of the National Development and Reform Commission indicated that Q1 GDP, which will be released in about 10 days, is likely to be near 8.4%. The consensus was for 8.3%.

The Reserve Bank of Australia left rates steady at 4.25%. Yet the better Chinese data and the disappointment to those that had expected a cut Tuesday did not spark rally in the Australian dollar. If anything, the RBA statement simply increases the market's anticipation for a rate cut next month. It will take an upside surprise to the consumer price index figure due April 24 to dash such expectations.

The RBA's comments that output growth is slower than previously anticipated, following Monday's dismal building approval data (-7.8% in February compared with consensus for a 0.5% increase) and Tuesday's more mild disappointment on retail sale (0.2% vs consensus of 0.3), will keep the focus on domestic variables for the policy outlook. As we noted Monday, in the most recent reporting week, the net long AUD futures positions grew because the shorts covered.

Some players appear to be re-establishing short positions and the Australian dollar has scope to test the $1.03 area. A break there could spur another 2 cent decline, especially if the CPI moderates. The market anticipates 80 basis points in cuts over the next 12-months.


Minutes from the recent Federal Open Market Committee meeting will be reported Tuesday. There are many participants who continue to look for QE3, but we do not expect much for them to hang their hats on in these minutes.

Recall, the FOMC statement recognized some improvement in the labor market and also higher energy prices. Given that the Fed's leadership thinks that quantitative easing has been successful, they are not about deny themselves such a tool if needed. However, as Operation Twist enters its final months, it would not be surprising to see more discussions of options, including extending the Twist or sterilizing additional purchases.

The UK construction PMI was significantly stronger-than-expected, though the reaction from sterling has been muted. Gilt yields and the stock market are lower. However, the headline activity index increased to 56.7, a 21-month peak, against expectations of a rise of 53.4 from 54.3 in February.

The forward-looking component, new orders, surged to its best level since mid-2007. Service PMI is released tomorrow and is expected to remain in expansionary territory. The consensus is for 53.4. Better activity should reduce the potential for further QE, which should support sterling against the euro. The dollar should continue to outperform sterling, though. Resistance near the recent high ahead of 1.61. Support near the 200-day MA (1.585).

There will be a lot of news for the Brazilian industrial sector today. February IP is expected to decline almost 6% year over year, reinforcing that the industry has been the hardest hit sector of the Brazilian economy during the recent slowdown.

However, investors should not read too much into Tuesday's data since it will be heavily distorted by the carnival holidays. More importantly, President Dilma is scheduled to speak at 10am local time (9am EST) and is widely expected to announce further measures to boost growth.

Locals speculate that the announcement will focus on tax measures to boost the industry along with additional funding for the development bank BNDES by as much as R$30 billion. The automobile sector is thought to be one of the greatest beneficiaries.

The Bovespa outperformed most global bourses in expectation of the measures but the BRL underperformed as some feared foreign-exchange-related measures may also creep into the new package.

We think USD/BRL will stay above the 1.80 level for now, but we expect the pair to gradually make its way back toward the 1.75 later in the year.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.